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Why You Should Ratchet Down Your Risk in Consumer-Oriented ETFs

02 August 2013 at 11:28 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Bartenders, waiters and other service staff in hospitality and retail comprised more than half of the 162,000 jobs created in July. The Bureau of Labor Statistics (BLS) revised job growth for the previous two months lower. Meanwhile, one of the premier measures of employment trends, the labor force participation rate, hovers near 35-year lows.

Job growth over the last 9 months is averaging about 175,000; most of the positions generated occur at the lower end of the salary spectrum. And lest anyone believe that the data represent vibrant job creation, we should recall that job growth in the 5-year period between 2003 and 2007 averaged the same numbers (176,000), yet commentators routinely described the growth as a “jobless recovery.”

Clearly, the Fed’s rate manipulation is not doing much in the way of stimulating full-time employment at corporations. On the other hand, it has done a great deal to boost property prices, stock prices and overall consumer spending. When rates are low, Americans respond to the siren’s song of borrowing to spend. The most recent monthly data showed a 0.5% increase in spending with only a 0.3% increase in income. In other words, we’re spending more than we make.

The short-term investing implications of spending more than we make is an exceptional run-up in consumer discretionary stocks. The SPDR Select Sector Consumer Discretionary Fund (XLY) is one of the strongest sectors of the stock market over the last 2 years; it is also a staggering 16.8% above a long-term 200-day trendline.

XLY 200

The question always arises, of course, how long can we spend more than we make as individuals, families or governments here in the U.S? Most businesses do not operate successfully in this manner… or they’d go bankrupt like Detroit.

There’s another reason to be cautious on ETFs tied to consumer spending. Specifically, elevated rates from earlier in the year now have the potential to create greater volatility in property prices. Remember, ridiculously easy credit (e.g., “liar loans,” no money down, adjustable-only, etc.) was largely responsible for the 2002-2006 real estate bubble. Credit may not be as easy this time around and we may not be staring down the barrel of an imminent disaster. Nevertheless, exceptionally low mortgage rates for an extensive period of time has pushed home prices higher and added to the “wealth effect.” If rates rise much further, home prices may not just stall, they could fall; the wealth effect could reverse course once again.

In my opinion, the smarter way to play the current uptrend in a consumption-oriented economy is via Market Vectors Retail (RTH). The fund offers a less volatile way to invest in the consumer because it is weighted equally between consumer defensive and consumer cyclical stocks. What’s more, RTH has lower beta risk than XLY. Moreover, the last 2 years have seen similar gains in both ETFs.

RTH and XLY

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

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